What is a Traditional IRA?
An Individual Retirement Account (IRA) is a tax-advantaged account you open through a brokerage to save for retirement. In a Traditional IRA, you may deduct contributions from your taxable income in the year you make them, the investments inside grow tax-free, and you pay ordinary income tax on the money when you withdraw it in retirement.
Key features
- Tax deduction up front: contributions may reduce your current-year taxable income, subject to income limits and whether you have a workplace retirement plan
- Tax-deferred growth: dividends, interest, and capital gains are not taxed year to year
- Annual contribution limit: set by the IRS each year (check the current year's limit); catch-up contributions allowed at age 50+
- Early withdrawal penalty: withdrawing before age 59½ typically triggers a 10% penalty on top of ordinary income tax, with a handful of exceptions
- Required Minimum Distributions: you must begin withdrawing minimum amounts starting at the RMD age set in current law
Traditional vs. Roth
The core trade-off with a Roth IRA is when you pay the tax. Traditional = deduct now, pay later. Roth = pay now, withdraw tax-free later. Choice usually turns on whether you think your tax rate will be higher now or in retirement.
A Traditional IRA is the classic choice for workers who expect to be in a lower tax bracket in retirement than they are today.